Basics of Life Insurance in 2015

There are no two ways about the fact that life insurance is a must-have for just about everyone. So it’s important to make the right choice when it comes to buying life insurance.

This calls for a keen understanding of the topic and the value a life insurance policy can add to your life and the lives of your loved ones.

What is life insurance?

Individuals take insurance to cover loss of life. They expect the insurance policy to provide financial cover to the dependents in their absence. The way to go about achieving this is by making sure the life insurance cover is adequate.

How insurance can be useful

Insurance can prove advantageous in meeting several financial goals of the individual and his family. Here are some of the important ones:

Financial cover against loss of life, which makes sure your family can support itself in your absence

Child’s education

Child’s marriage

Buying a house

Pension or regular income post-retirement

Post-retirement income for NRIs

These are just some of financial goals you can achieve with the help of life insurance. More importantly, life insurance plans are flexible.

This means although you won’t find an insurance plan dedicated to buying a house, you can buy an endowment plan (traditional or market-linked) with the aim of paying for a house at a future date.

Types of insurance

Broadly, there are five basic types of life insurance plans:

Term insurance

Term plans are the most basic form of life insurance. They provide life cover with no savings / profits component.

They are the most affordable form of life insurance as premiums are cheaper compared to other life insurance plans.

Endowment plans

Endowment plans differ from term plans in one important aspect i.e. maturity benefit.

Unlike term plans which pay out the sum assured, along with profits, only in case of an eventuality over the policy term, endowment plans pay out the sum assured under both scenarios – death and survival.

Unit linked insurance plans (ULIP)

ULIPs are a variant of the traditional endowment plan. They pay out the sum assured (or the investment portfolio if it’s higher) on death/maturity.

Since ULIPs invest in stock markets they are well-suited for individuals with appetite for risk.

Whole life policy

A whole life policy covers a policyholder over his life. The main feature of a whole life policy is that the validity of the policy is not defined so the individual enjoys the life cover throughout his life.

Money back policy

This is a variant of the endowment plan. A money back policy gives periodic payments over the policy term. To that end, a portion of the sum assured is paid out at regular intervals.

If the policy holder survives the term, he gets the balance sum assured.

How much life insurance do I need

Although, it is not possible to attach a rupee value to human life, it is nonetheless important for you to estimate the value of your life in terms of what it will take for your family members to be financially independent in your absence.

In insurance parlance this is the sum assured and the financial estimate of the value of your life is called Human Life Value or HLV.

Calculating the HLV involves two steps:

The fundamental method of calculating the human life value involves two steps:

Add up all expenses like household expenses, lifestyle expenses among others

Calculate future liabilities (like outstanding loans) that your family members will have to pay off in the event of your death.

Once you add the two figures, you get your human life value, which in effect is the sum assured for your life insurance policy.

Points to remember:

There is no one-size fits all life insurance plan. Your life insurance plan does not have to be like your friend’s or colleague’s or relative’s insurance plan. Your needs and goals are different and this must reflect in your insurance plan.

The earlier you start the better it is, since life insurance premiums are lower at an earlier age and begin to rise as you age

Go for term plans – they are the most affordable form of life insurance which means you get a larger life cover at a lower premium

Use riders effectively to enhance the effectiveness of your life insurance policy. A rider is an add-on to the primary policy, which offers benefits over and above the policy subject to certain conditions.

Feel free to talk to an experienced and competent agent about the policy details and whether it is suited to you